Editors: Joanna L. Crosby Linda Tai Hoshide Michael W. Morrison Kathleen A. Sweitzer

Transcription

1 February 2012 Commercial General Liability Dispatch Editors: Joanna L. Crosby Linda Tai Hoshide Michael W. Morrison Kathleen A. Sweitzer Volume 3 Issue 2 In This Issue... California Federal Court Decides That The Insured Has to Pay the SIR Policy Language Doesn t Really Mean the Insured Has to Pay the SIR California Federal Court Finds Ongoing Operations Language in an Additional Insured Endorsement to Be Ambiguous Arizona Appellate Court Finds Settlement Agreement Between Insured and Excess Carrier Assigning Rights Against Primary Carrier Enforceable Not So Fast The Fifth Circuit Holds That Damaged Property Outside the Scope of the Contracted Work Is Not Excluded By the Your Work Exclusion The Fourth Circuit Finds That Inmate Required to Work in Prison Does Not Constitute an Insured Volunteer Worker Florida Appellate Court Allows Insurer to Reform Policy and Deny Coverage Mary E. McPherson, Partner in the Orange County 6 California Federal Court Decides That The Insured Has to Pay the SIR Policy Language Doesn t Really Mean the Insured Has to Pay the SIR In National Fire Insurance Company of Hartford v. Federal Insurance Company, No RS, 2012 U.S. Dist. LEXIS 641 (N.D. Cal. Jan. 4, 2012), a federal district in California held that despite language in an SIR endorsement that the insured itself was responsible to pay the SIR, the SIR could be satisfied by other insurance because other language in the endorsement implied other persons could pay it; thus, the policy did not unambiguously limit who could pay the SIR. In National Fire, the issue before the United States District Court for the Northern District of California was whether the Self-Insured Retention endorsement ( SIR ) required that only the insured could satisfy the SIR with its own funds or whether the retention could be paid by other insurance or other persons. The insured was a restaurant located within a hotel. The restaurant hosted a graduation party at which a three-year-old girl fell to her death from a balcony. California Illinois New Jersey New York The girl s family brought a wrongful death suit, initially against the hotel only, which was insured by Federal Insurance Company ( Federal ). The hotel tendered its defense to National Fire Insurance Company of Hartford ( National Fire ), the primary insurer for the restaurant, on the basis that the hotel qualified as an additional insured under the restaurant s policy. National Fire paid its policy limit to settle the case on behalf of the restaurant and the hotel, and then sued Federal for contribution. After finding that the hotel was entitled to additional insured coverage under the National Fire policy, the court addressed the issue of priority of coverage as between the National Fire and Federal policies, and the related issue of whether payments made by National Fire on behalf of the hotel satisfied the Federal policy s SIR. The Federal policy was subject to a $250,000 SIR.

2 Continued from Page 1 The SIR provision stated that [w]e [Federal] have no obligation or liability under such Coverages unless and until the applicable Self-Insured Retentions are exhausted by payments you make You must pay all self-insured retention expenses. You was defined in the policy to mean the Named Insured. Relying on the 2010 California state court in Forecast Homes, Inc. v. Steadfast Insurance Company, 181 Cal. App. 4th 1466 (Cal. App. Ct. 2010), Federal argued that by its terms its policy language required the hotel to pay the SIR with its own funds, and that the retention could not be satisfied by other insurance. The court rejected this argument, finding that in Forecast Homes, the provision concerning the SIR provision expressly and affirmatively stated that Payment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention. The Federal policy did not contain such affirmative language. Moreover, and critical to the court s decision, Federal s SIR provision also stated that the bankruptcy, insolvency or the financial impairment of any insurer or any other person or organization, would not relieve the insured of its obligation to satisfy the SIR. The court found that the reference to the bankruptcy of any insured or any other person implied that the SIR could be paid by other insurers, or other persons, and at the very least, did not clearly require the [insured] hotel to satisfy the SIR out of its own pocket negating the requirement that SIR must be paid by you. Courts are continuing to find ways to avoid application of SIRs and reach a result favorable to the insured. The National Fire decision appears to add another layer to the requirement: an affirmative statement in the SIR provision that payment by others cannot satisfy the SIR and that there is no references to satisfaction of the SIR by any other person or insurer in any context. This opinion adds to the body of California case law with interpretations of SIR language favorable to the insured dating back to General Star National Insurance Corp. v. World Oil Company, 973 F. Supp. 943 (C.D. Cal. 1997) and Vons Cos. v. United States Fire Insurance Company, 78 Cal. App. 4th 52 (Cal. App. Ct. 2000), and more recently, in cases such as Forecast Homes, Mt. McKinley Insurance Company v. Swiss Reinsurance America Corp., 757 F. Supp. 2d 952 (N.D. Cal. 2010) and Travelers Indemnity Company v. Arena Group 2000, L.P., No. 05-CV-1435, 2007 U.S. Dist. LEXIS (S.D. Cal. March 8, 2007). These cases establish the general rule that absent express and unambiguous language restricting payment of a retention to the insured, California courts will allow retentions to be satisfied by secondary sources, including other insurance. Insurance companies should monitor these decisions and review the wording of their SIR endorsements to ensure they will be enforced as intended. California Federal Court Finds Ongoing Operations Language in an Additional Insured Endorsement to Be Ambiguous Jessica L. Swaysland, Associate in the Chicago In McMillin Construction Services, L.P. v. Arch Specialty Insurance Company, No. 10cv2592, 2012 U.S. Dist. LEXIS 8339 (S.D. Cal. Jan. 25, 2012), a California federal court, relying upon an unpublished Ninth Circuit case, found that the ongoing operations language in an additional insured endorsement to be ambiguous and refused to impose a temporal limitation on coverage. In 2003, Lexington Insurance Company ( Lexington ) issued an insurance policy to MJB Heating & Air Conditioning, Inc. ( MJB ) providing coverage to MJB for work performed as a subcontractor for McMillin Construction Services, L.P. ( McMillin ). The policy included an ongoing operations additional insured endorsement in favor of McMillin. During the policy period, a construction defect claim arose that resulted in McMillin and MJB filing claims under the Lexington policy. Lexington denied coverage to both entities and sought partial summary judgment on two separate bases: (1) the language of the Additional Insured Endorsement was limited so as to only provide for a duty to defend McMillin during MJB s ongoing operations ; and (2) the language of Exclusions j(5) and j(6) limited coverage, during ongoing operations, to damage to third party persons or properties (i.e. Page 2

3 Continued from Page 2 Exclusions j(5) and j(6) would effectively remove from coverage all injury or damage that did not occur during the insured s ongoing operations and did not occur to third party persons or properties). The McMillin court rejected both arguments. The specific Additional Insured Endorsement at issue amended Section II of the Lexington policy to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured. Lexington argued that the language in this endorsement should be interpreted as providing for a duty to defend McMillin, but only during the time that MJB was engaged in ongoing operations. According to Lexington, because MJB s operations were no longer ongoing at the time the claim was made, it had no duty to defend McMillin under the Additional Insured Endorsement. In response, McMillin and MJB argued that because the claim at issue arose out of MJB s operations, regardless of the timing of those operations, the Additional Insured Endorsement afforded coverage for the claim. The court agreed with McMillin and MJB and found persuasive a Ninth Circuit s unpublished decision in Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Company, 426 Fed. Appx. 507, 2011 U.S. App. LEXIS 7467 (9th Cir. 2011) (unpublished). In Tri-Star, the Ninth Circuit addressed an Additional Insured Endorsement substantially similar to the endorsement contained in the Lexington policy. Applying Arizona law, the Ninth Circuit found the ongoing operations language ambiguous as to whether there is a temporal limitation on coverage. Specifically, the Tri-Star court determined that the language could be construed as imposing a temporal limitation as contended by Lexington, but also that the language could also be construed as addressing merely the type of activity from which liability must arise in order to afford coverage as argued by McMillin and MJB. Because of this ambiguity, the Tri-Star court ruled in favor of the insured. Finding the unpublished Tri-Star case persuasive, the McMillin court held that the Additional Insured Endorsement at issue was ambiguous and Lexington was not entitled to summary judgment on that basis. In addition, the court also rejected Lexington s argument that Exclusions j(5) and j(6) limit coverage during ongoing operations to damage to third party persons or properties. Because it found that the Lexington policy covers damages arising out of MJB s operations regardless of timing, the court held that, at most, Exclusions j(5) and j(6) would only bar coverage for certain injuries and property damage occurring during MJB s operations. Accordingly, the court determined that the carriers were not entitled to summary judgment since they could not meet their burden to show these exclusions applied. The McMillin decision is an important one because it addresses the interpretation of ongoing operations in an additional insured endorsement, which has not yet been widely addressed by courts. It is important to note that this is a federal court decision, which found an unpublished Ninth Circuit case to be persuasive on its interpretation of ongoing operations. As states are split as to the interpretation of ongoing operations, there is likely going to be more litigation regarding this language. Dana M. Ugolini, Associate in the Chicago Page 3 Arizona Appellate Court Finds Settlement Agreement Between Insured and Excess Carrier Assigning Rights Against Primary Carrier Enforceable In Colorado Casualty Company v. Safety Control Company, No. 1-CA-CV , 2012 Ariz. App. LEXIS 3 (Jan. 5, 2012), the Arizona Court of Appeals held that a Damron agreement between an insured and its excess insurer assigning the insured s rights against the primary insurer was enforceable. The court, however, remanded the case to determine whether the stipulated judgment fell within the primary policy. The Arizona Department of Transportation ( ADOT ) hired DBA Construction Company ( DBA ) to perform road improvements. DBA subcontracted with Safety Control Company, Inc. ( Safety ). As required by the subcontract, Safety obtained a primary policy from Employers Mutual Casualty Company ( Employers ) under which DBA was an additional insured for liability arising out of Safety s work. DBA also obtained a policy from Colorado Casualty Company ( Colorado ) that provided excess coverage for liability arising out of the work of its subcontractors. A collision occurred at the construction site, which

4 Continued from Page 3 injured motorist Roman, who in turn sued ADOT and DBA. Colorado tendered DBA s defense, which was rejected by subcontractor Safety and its insurer Employers. Thereafter, ADOT and DBA stipulated to a judgment of $750,000 with Roman under which Roman agreed not to execute. Colorado then filed suit against subcontractor Safety and its insurer Employers, and Roman was permitted to intervene. The trial court ruled that Employers had breached its defense obligation and was liable for the judgment because DBA was entitled to settle without Employers consent and the settlement was not collusive or fraudulent. Safety and Employers appealed. In considering whether the settlement agreement between DBA and Roman was valid, the court noted that in Damron v. Sledge, 105 Ariz. 151 (1969), the court held that when an insurer breaches its defense obligation, the duty of cooperation does not prevent the insured from entering into a settlement with and assigning his rights under the policy to the claimant. As long as the stipulated judgment is not fraudulent or collusive, an insurer that has failed to defend is bound by the judgment with respect to all matters that were litigated or could have been litigated in that action. Employers argued that the settlement was collusive because, unlike in Damron, DBA did not settle to avoid personal liability, as the purpose of the agreement was to shift liability from Colorado to Employers. The court rejected Employers argument, finding the settlement simply placed liability with the primary insurer, where it should have been in the first instance. The court also noted that Employers may not escape the consequences of its decision to decline to defend DBA in this case simply because DBA s excess insurer did not make the same decision. The court then addressed whether the Employers policy provided coverage. With respect to whether the judgment was for liability that arose out of Safety s operations, the court remanded the issue because the stipulated judgment did not specify how the collision occurred or the manner in which any of its subcontractors was negligent. The record contained no finding on the particular issue. Roman also claimed that Safety breached its subcontract by failing to procure completed operations coverage for DBA. While noting that the subcontract required Safety to procure completed operations coverage for DBA, the appellate court also addressed Safety s argument that a Damron agreement may not be enforced against a party that is not an insurer. Because Safety s liability would not flow from any indemnity it owed to DBA, general rules of contract damages apply. That is, by contrast to damages owed by an insurer under Damron, the amount for which Safety would be liable would not be measured by the stipulated judgment, but by the amount that would have been payable under the completed operations coverage. The appellate court remanded, directing the superior court to modify the judgment accordingly. This case demonstrates that a primary carrier must carefully consider its defense obligation. A wrongful refusal to defend can expose a primary carrier to large settlements and judgments, as well as being bound by any issues determined by the settlement or judgment, where it received notice and an opportunity to participate in the underlying matter. Not So Fast The Fifth Circuit Holds That Damaged Property Outside the Scope of the Contracted Work Is Not Excluded By the Your Work Exclusion In American Home Assurance Company v. Cat Tech L.L.C., 660 F.3d 216 (5th Cir. 2011), the United States Court of Appeals for the Fifth Circuit determined that, under Texas law, the Your Work Exclusion did not bar coverage for damage to property not within the scope of the insured s work. Tech, finding it responsible for the damage and awarding Ergon $1,973,180. As part of the award, the arbitrators found that during the servicing process, there had been significant damage to certain components, which included components that fell within the scope of Cat Tech s contract. Donald E. Elder, Partner Abraham Sandoval, Associate in the Chicago Cat Tech, L.L.C., while servicing a hydrotreating reactor owned by Ergon Refining, Inc., damaged several of the reactor s components. After Cat Tech attempted to repair the damage, additional damage occurred. The dispute resulted in an arbitration award against Cat With an arbitration award entered against it, Cat Tech, in turn, sought indemnification from its CGL insurer, American Home Assurance Company, and its umbrella insurer, National Union Fire Insurance Company of Pittsburgh. The insurers, however, declined coverage Page 4

5 Continued from Page 4 based on identical Your Work exclusions that precluded coverage for property damage to your work arising out of it or any part of it and included in the products-completed operations hazard. Your work was defined as work or operations performed by you or on your behalf and materials, parts or equipment furnished in connection with such work or operations. The insurers sought a declaratory judgment from the district court that the your work exclusion barred coverage of the arbitration award. The district court agreed and held that the exclusion precluded coverage for all of Cat Tech s claims. On appeal, Cat Tech argued that the district court erred in finding that the insurers had satisfied their burden of establishing that the exclusion precluded Cat Tech s claims. The Fifth Circuit, in reversing the district court, defined three categories of property damage that had to be considered in applying the exclusion: (1) property damage to the specific parts of the reactor upon which Cat Tech performed defective work; (2) property damage to those parts of the reactor upon which Cat Tech performed non-defective work, but were nonetheless damaged; and (3) property damage to other parts of the reactor upon which Cat Tech did not work. The Fifth Circuit concluded that under Texas law, the your work exclusion precludes coverage only for the first two categories, i.e., that portion of the reactor upon which Cat Tech performed repair services, defective or otherwise. The Fifth Circuit held, however, that the exclusion did not preclude coverage for property damage to other parts of the reactor upon which Cat Tech did not work. Ultimately, the Fifth Circuit remanded the case for further proceedings because the underlying arbitration award was far too vague in its description of the damage to the reactor and how that damage relates to the work Cat Tech performed. On remand, the district court was directed to conduct any additional factfinding necessary to determine whether the damage suffered by Ergon s reactor was limited only to those components upon which Cat Tech worked or instead included other components unrelated to Cat Tech s work or operations. In reaching its decision, the Fifth Circuit distinguished the holding in Mid-United Contractors, Inc. v. Providence Lloyds Insurance Company, 754 S.W.2d 824 (Tex. ct. App. 1988), in which the court found that coverage was precluded only for damage to the insured s defective work, not for damage to non-defective work. In Mid-United Contractors, the particular exclusion at issue was narrower and only barred coverage for property damage... to... that particular part of any property... the restoration, repair or replacement of which has been made or is necessary by reasons of faulty workmanship thereon by or on behalf of the insured. The Fifth Circuit explained that the your work exclusion, unlike the particular part exclusion, did not contain any language that limited the application of the exclusion only to property upon which the insured performed defective or faulty work. In so holding, the Court correctly focused on the precise language contained in the exclusion. Elizabeth McGarry, Associate in the Chicago Inmate Required to Work in Prison Does Not Constitute an Insured Volunteer Worker Due to Coercive Nature of Position In National Union Fire Insurance Company of Pittsburgh v. Lambert, No , 2012 U.S. App. LEXIS 1143 (4th Cir. Jan. 20, 2012), the United States Court of Appeals for the Fourth Circuit held that a prison inmate did not qualify as a volunteer worker and thus was not an insured under the state s comprehensive liability policy. The court reasoned that to be considered a volunteer worker, the inmate must have elected to work of his own volition. Although the inmate chose to seek a position in the kitchen at the prison, he was nonetheless compelled to work at the jail. The jail s coercive authority and virtually absolute control over him precluded the court from classifying the inmate as a volunteer worker under the term s plain and ordinary meaning. Lambert involved an injury sustained by an employee of a West Virginia prison, allegedly caused by a prison inmate, Ezra Lambert. Betty Jean Hale worked with Lambert in the kitchen, although she was not an inmate. Hale alleged that Lambert injured her in October 2006 when a mixer fell off of a cart that Lambert was pushing and struck Hale s foot. Hale filed suit and named Lambert, Aramark, the West Virginia Department of Military Affairs and Public Safety, and the West Virginia Regional Jail and Correctional Facility Authority as defendants. At the time of the incident, the state of West Virginia was insured under a comprehensive liability policy issued by National Union Fire Insurance Company of Pittsburgh. Page 5

6 Continued from Page 5 The National Union policy provided that the insurer would defend any suits and pay any claims against an insured that fell within the policy s coverage. The policy defined the term insured in part as any faculty member, employee, volunteer worker or student teacher of the Named Insured while acting within the scope of their duties as such. The court, therefore, was called upon to determine whether Lambert constituted an insured under the National Union policy. After receiving notice of the Hale Lawsuit, National Union filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Lambert. Hale and Lambert asked the court to declare that Lambert is an insured under the policy and therefore entitled to defense and indemnification. National Union and Hale filed cross motions for summary judgment, each presenting the issue of whether Lambert qualified as an insured volunteer worker under the policy. The district court held that the term was unambiguous and that Lambert did qualify as an insured volunteer worker. National Union appealed. On appeal it was agreed that Lambert constituted an insured under the policy only if he was considered a volunteer worker. Lambert, an inmate at the Southwestern Regional Jail in West Virginia, was required to work at the jail. He could announce a preference from a limited set of options to fulfill his work obligation, but the assignment was ultimately within the sole discretion of the jail. After submitting an application to Aramark Correctional Services, Inc., the contractor in charge of kitchen operations, Lambert began work in the Jail s kitchen. He did not receive any financial benefits from his service. Rejecting the argument that Lambert s choice to work in the kitchen qualified him as a volunteer worker, the Fourth Circuit, applying West Virginia law, found that the argument obscures the broader portrait of institutional confinement, which is hallmarked by the Jail s coercive authority over inmates like Lambert. The court held that Lambert s status as an inmate in particular his duty to work compelled reversal. The Fourth District s decision in Lambert is limited to a very particular set of circumstances. However, it serves to shed light on the interpretation of the term volunteer worker with respect to general liability policies. Based upon the decision reached in Lambert, when determining whether an individual constitutes an insured volunteer worker, insurers should take into consideration not only the individual s title and/or responsibilities. If the individual is not working of his or her own volition, he is not likely a volunteer worker for purposes of insurance coverage. Insurer Allowed to Reform Policy and Deny Coverage In Federal Insurance Company v. Donovan Industries, Inc., 75 So.3d 812 (Fla Dist. ct. App. 2011), a Florida Appellate Court found that the omission of an exclusion in a general liability policy was a mutual mistake and allowed the insurer to reform the policy to reflect the parties intent to exclude claims arising out of exercise balls. discovered the error, issued a corrected endorsement on October 9, 2007, and mailed two copies of the corrected policy to Donovan s broker. The broker filed the policies away without reviewing them and without notifying Donovan. In June 2008, the broker directed Federal to bind coverage under a renewal proposal that contained an exclusion endorsement for exercise balls. Jill Jennings Drzewiecki, Partner in the Chicago Donovan Industries, Inc. retained a broker to procure commercial general liability coverage. The broker contacted Federal Insurance Company, who sent a proposal on June 5, 2007, for coverage that contained an exclusion endorsement for all exercise balls in light of two lawsuits pending against Donovan relating to the balls. The broker advised Federal that although the balls had been removed from the market, Donovan was fine with the exclusion endorsement. On June 20, 2007, Federal issued the policy but the exclusion endorsement was inadvertently left blank. There was no mention of the exercise balls. Federal later In July 2009, Michael Schneck filed a claim against Donovan for injury arising out of an exercise ball. Donovan, reportedly unaware of the corrected endorsement for the 2007 policy, tendered the Schneck claim to Federal. Federal denied coverage based on the exclusion endorsement of the corrected policy. Donovan then sued Federal. The trial court granted Donovan s motion for summary judgment and denied Federal s request for reformation, finding there was coverage for the claim because the original policy did not contain the exclusion. The trial court found that Federal s effort to notify Donovan of the error by mailing copies to Donovan s broker was inexcusable Page 6

7 Continued from Page 6 and found that the insured relied on the language of the original policy. The appellate court reversed, holding that the trial court s emphasis on the manner in which Federal notified Donovan of the error was misplaced. The appellate court found the situation a textbook case for reformation because the insured had never disputed that it had agreed to the exclusion. Donovan could not have contested its agreement because it was bound by the actions of its broker, who had notified Federal of Donovan s agreement to accept the exclusion. The fact that Federal drafted the policy did not preclude reformation. The appellate court also pointed out that Donovan did not pay a premium for coverage for claims involving exercise balls, and ruled that the inclusion of the blank exclusion endorsement was a mutual mistake entitling Federal to reformation. The appellate court s decision to reform the policy to reflect the parties expressed intentions is consistent with the overall premise of policy interpretation, which is to give effect to the intentions of the parties. The court exercised its powers to avoid what would have been a windfall to the insured, i.e. coverage that it never intended to purchase and for which it did not pay a premium. Also significant is that the appellate court held that Federal would have been entitled to reformation even had it discovered the error after the Schneck claim was filed. If you have any questions concerning this bulletin or the Tressler General Liability & Excess Insurance Group, please contact our editors: Joanna L. Crosby - Newark 973/ jcrosby@tresslerllp.com Linda Tai Hoshide - Los Angeles 310/ lhoshide@tresslerllp.com Michael W. Morrison - Chicago 312/ mmorrison@tresslerllp.com Kathleen A. Sweitzer - Chicago 312/ ksweitzer@tresslerllp.com Tressler s: 233 S Wacker Drive 22nd Floor Chicago, IL / Fax 312/ West Briarcliff Road Bolingbrook, IL / Fax 630/ Avenue of the Stars Suite 450 Los Angeles, CA / Fax 310/ Broad Street Suite 1510 Newark, NJ / Fax 973/ One Penn Plaza Suite 4701 New York, NY / Fax 646/ Von Karman Avenue Suite 800 Irvine, CA / Fax 949/ This newsletter is for general information only and is not intended to provide and should not be relied upon for legal advice in any particular circumstance or fact situation. The reader is advised to consult with an attorney to address any particular circumstance or fact situation. The opinions expressed in this newsletter are those of the authors and not necessarily those of Tressler LLP or its clients. This announcement or some of its content may be considered advertising under the applicable rules of the Supreme Court of Illinois, the courts in New York and those in certain other states. For purposes of compliance with New York State Bar rules, our headquarters are Tressler LLP, 233 S Wacker Drive, 22nd Floor, Chicago, IL 60606, Prior results described herein do not guarantee a similar outcome. The information contained in this newsletter may or may not reflect the most current legal developments. The articles are not updated subsequent to their inclusion in the newsletter when published. Click here to add yourself, or someone else, to any of our mailing lists! Page 7